Bubble Contagion: Mexico City to Tokyo to Bangkok to New York, London, and Reykjavik

Abstract

That four waves of surges in cross-border indebtedness and in prices of securities and of real estate have occurred in 50 years may set a record for global monetary instability. This succession of waves of financial crises might have been a coincidence; the alternative explanation is that one or several of these waves led to increases in cross-border investment inflows into other centers that led to increases in the prices of securities to levels that eventually became too high to be sustained. The pattern is that the implosion of a bubble leads to a change in cross-border money flows that inflates a bubble elsewhere. In this pattern, a consistent feature is the ability of international banks to source funding in the international money market to lend to borrowers in various countries.